Finding the right mortgage for you is one of the most important steps in buying your home. There are different types of mortgages offered by lenders in Canada. The main ones are Open, Closed and Variable Mortgages.
An “
OPEN MORTGAGE” allows the flexibility of prepayment. You can pay part or all of the balance owing without any type of interest penalty.
A “
CLOSED MORTGAGE” keeps payments unchanged for the duration of the loan period. It provides payment stability but penalizes a mortgagor who wishes to terminate the mortgage earlier. Each institution will have their own repayment options and policies. Most offer some type of extra pre-payment option that allows you to make extra principal payments to pay off your mortgage faster.
A “
VARIABLE RATE MORTGAGE” changes based on the banks prime rate and therefore fluctuates with the market changes. It offers the advantage of lower rates if mortgage rates decline. On the other hand, it exposes the mortgagor to the risk monthly payments will go up if mortgage rates rise.
The life of your mortgage is referred to as the
AMORTIZATION PERIOD or term. The most popular terms range between 25 to the maximum of 30 years.
A ”
FIXED RATE MORTGAGE” keeps the mortgage rate the same throughout the life of the mortgage even if rates rise. If rates go down, a fixed rate mortgage may prove to be more expensive than a variable rate one. The terms available range from six months to ten years.
A “
CONVENTIONAL MORTGAGE” is a loan up to 80% of the appraised value or purchase price of the property, which is less. The remaining amount comes from the borrower’s own resources and is known as the Down Payment. Mortgages that exceed this limit by law must be insured against default, and are referred to as “ High Ratio Mortgages”.
A ”
HIGH RATIO MORTGAGE” is used for loans that exceed conventional mortgage lending guidelines. These mortgages are granted under the National Housing Act (NHA) and must, by law, be insured against default through Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada (GENWORTH). The borrower will have to pay the insurance premium, which can range from 0.50% to 3.15% of the total mortgage amount. Typically, the insurance premium is added to the principle amount of the mortgage. With a high ratio mortgage, people can purchase a home with as little as a 5% down payment.
MORTGAGE CRITICAL ILLNESS INSURANCEIs available as an enhancement to Mortgage Life Insurance. It is recommended for all mortgagors. It can pay off your mortgage if you are diagnosed with different types of illness (i.e. types of cancer, heart attack, or stroke). Coverage will vary between the different insurance companies that offer this type of insurance with the institutions.